Should we be Afraid of Deglobalization?

Peter A.G. van Bergeijk discusses this topic and it’s implications on policy makers.

Peter A.G. van Bergeijk, is professor of international economics at the International Institute of Social Studies of Erasmus University, The Netherlands. His most recent book is Deglobalization 2.0: Trade and openness during the Great Depression and the Great Recession, Edward Elgar, April 2019.

Before the outbreak of the Great Recession, in the era of globalization, it was well recognized by economic historians that globalization was not new and many comparisons exist between the globalization phases of 1870–1914 and the post Second World War wave that ended in 2008. It is now time to also recognize that deglobalization is not new either, and that it is here to stay for quite some time. Should we be afraid of this new phase of deglobalization?

The world economy is going through a phase of deglobalization again. This fundamental change in our economic environment is not a new phenomenon from a long run perspective, because also in the 1930s a period of deglobalization occurred, but it is definitely new to the current generation. We can glean from history the pattern of emerging deglobalization. The start of the story line is a major economic crisis that reduces demand, increases uncertainty and destroys confidence. Next follows a collapse of world trade and investment that marks the end of decades of intensifying globalization, characterized by increasingly free international trade and capital flows. This world trade (and investment) collapse starts a period of deglobalization that at first remains hidden under the veil of initial recovery, but later becomes clear and measurable. Figure 1 shows this pattern for the most recent manifestation. In the early 2000s openness (on the vertical axis) increases until it reaches an all-time high in 2008 and then deglobalization sets in. Deglobalization gets momentum around 2013 and at the same time uncertainty (on the horizontal axis) increases and moves into unknown territory. The figure makes an important point: deglobalization started well before Trumpism and Brexit came on the horizon. Rather than being the causes of deglobalization we should therefor treat them as symptoms: the world has fundamentally changed and the wave of deglobalization that we are currently experiencing may be here to stay for quite some while.

Figure 1 openness and economic policy uncertainty of the world economy

Sources: Davis, Steven J., 2016. “An Index of Global Economic Policy Uncertainty,” Macroeconomic Review, October, updated on http://www.policyuncertainty.com and
P.A.G. van Bergeijk Deglobalization 2.0: Trade and openness during the Great Depression and the Great Recession, Edward Elgar, 2019

Democracy and deglobalization

To some it may be especially worrying that the clearest manifestation of deglobalization occur in democracies, because democracies built the Bretton Woods institutions (and likewise the European Union). Indeed, the popular anti-globalist movements currently seem to hit the system at the heart. I do not want to downplay the issue of populism, but it is important to recognize that the turning point of globalization in all major economies appears to have occurred well before the recent trade shocks. Indeed the phenomenon of deglobalization requires a much broader conceptualization than the ‘backlash from globalization’ or the ‘retreat from globalization’ on which many studies have recently appeared. Deglobalization also occurs in countries where support for globalization is still strong, a puzzle that has not yet been addressed. The question is thus not if we should be afraid that a wave of deglobalization is coming, but rather if we should be afraid of the destruction of the current phase of deglobalization.

Brexit and Trump’s trade wars

Recent empirical studies on different forms of a hard Brexit agree that the trade impact is strongly negative in the UK and some EU member states (notably Ireland and the Netherlands), but also that Brexit creates ripples rather than a tsunami for the European Union as a whole and for the world economy. Also, the Trumpian trade wars have a significant negative impact in the United States and in the countries against whom the US President threatens trade war, but from a global perspective this creates a dent rather than a full break-down of globalization as experienced in the 1930s.

Figure 2 World trade in percent of world production (1880 – 2030)

Sources: and P.A.G. van Bergeijk Deglobalization 2.0: Trade and openness during the Great Depression and the Great Recession, Edward Elgar, 2019, updated using J. Bollen and H. Rojas-Romagosa, 2018, ‘Trade wars: Economic impacts of US tariff increases and retaliations. An international perspective’, CPB Background Document, CPB Netherlands Bureau for Economic Analysis: The Hague.

This is illustrated in Figure 2 that depicts the development of openness of the world economy since 1880. The dotted line (red) is based on forecasts for the world economy and has on top of that the worst case scenario of a recent study by Bollen and Rojas-Romagosa in which the US wages trade wars against all OECD countries. The important underlying assumption is that Trumpism does not spill over: counter measures are proportional (tit-for-tat) but do not leapfrog and the political trade shocks are limited to the bilateral relationships of the US. But how likely is it that deglobalization can be managed. In order to investigate possible futures the book develops four scenarios: 

• The end of the Liberal Peace: International relations crumble and international political and economic cooperation breaks down. The ensuing increase in uncertainty deters trade and investment and a downward spiral is set in motion. In this scenario the frequency of (armed) conflict increases and mass migration of refugees puts significant strain on the system.
• The deglobalization hoax: The critics and disbelievers of the deglobalization thesis have been right. In this scenario the period of deglobalization is a negligible dip only. It is not simply that the trend in the development towards further fragmentation of production and the growth rates of trade and foreign direct investment return to the growth rates experienced in the two decades before the Great Recession, but in this scenario there is a qualitative change of globalization with information (big data) leading towards further integration across borders.
• European hegemony: The third scenario features, so to say, the European Continent as the hegemon of last resort. In this scenario neither the United States nor China assume the role of world leader, either by choice or forced by internal and external circumstances. A hot trade war between the United States and China could fit in this scenario, for example, because trade is diverted to Europe.
• The Return of Bretton Woods: In this scenario multilateralism survives, because reasonable limits to globalization are developed both internationally and in the domestic economy of many countries. Popular support for the international organizations and international rules and regulations increases. Globalization of the real economy can be maintained at about the level that was reached around the turn of the Millennium. Financial globalization is constrained to or reduced below current levels.

These scenarios have not been designed to be used as stand-alone analyses, but to be analysed and appreciated simultaneously. While the integral view on the scenarios can be made along many dimensions (including, for example, the assumed technology developments or the support for international organizations or the extent of regionalization), Diagram 1 provides a summary snapshot of the four scenarios focussing on the tendency towards (de)globalization and the attainability of the Sustainable Development Goals in the four scenarios.

Conclusion

The key policy message again is that the world trade system can still be saved by the world community. Indeed, If anything past and present deglobalization phases substantiate the need for protection against the power play by big economic nations. The procedures, rules and regulations of the World Trade Organization (WTO), although certainly not perfect, still to some extent provide that protection to the developing nations and the smaller advanced economies.

Deglobalization 2.0

Peter A.G. van Bergeijk, International Institute of Social Studies of Erasmus University, The Netherlands.